Rank the following from highest present value to lowest present value. Assume all else equal. v An annuity with 10 payments An annuity due with 15 payments A perpetuity v An annuity with 15 payments
Rank the following from highest present value to lowest present value. Assume all else equal. v An annuity with 10 payments An annuity due with 15 payments A perpetuity v An annuity with 15 payments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Rank the following from highest present value to lowest present value. Assume all else equal.
v An annuity with 10 payments
v An annuity due with 15 payments
v A perpetuity
v An annuity with 15 payments
Expert Solution
Step 1
Present value of annuity is the current value of the future payments that are calculated using the interest rate or discount rate , the future cash flow is discounted to find the present value.
The formula of which is:
Present Value of periodic payment= P* (1- (1+r)-n)/r
Where,
P= periodic payments
r= rate of interest
n= number of period
And
Present Value of a single cash flow= Future Value / (1 + interest rate%)^n
Where,
n= number of period
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